Opinion: The stock market should be more worried about the hard economic data – MarketWatch

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The election of Donald J. Trump as president in November unleashed a wave of confidence among businesses, consumers, and investors that prosperity was just around the corner.

This so-called “soft” data, based mostly on sentiment surveys, point to a surging economy in which 3% GDP growth—which we haven’t seen consistently since the 1990s—was within reach. Consider:

•The University of Michigan Consumer Sentiment index stood at 97 in April, just off its 13-year high of 98.5 set in January. The Conference Board Consumer Confidence Index at 120.3 in April also remains strong, though it slid from recent highs in February and March.

•The Business Roundtable CEO Economic Outlook Index, which polls CEOs of the nation’s largest corporations on their expectations for sales and hiring over the next six months, showed its biggest increase in the first quarter since the fourth quarter of 2009.

•The NFIB Index of Small Business Optimism also slipped a bit last month, but April was the sixth consecutive month for high optimism, “a hot streak not seen since 1983,” the NFIB reported.

•The Wells Fargo/Gallup Investor and Retirement Optimism Index hit a 16-year high in the first quarter at +126. That’s the most optimistic investors have been since November 2000, when the index stood at +130 (although Gallup points out that the surge has been driven largely by Republicans, whose confidence is now 209 points higher than it was in the third quarter of 2016, something this column noted in March).

•The Dow Jones Industrial Average DJIA, +0.28% S&P 500 SPX, +0.15%  and Nasdaq Composite COMP, +0.25%  indexes are all on five-day winning streaks and within a whisker of their all-time highs.

If you look only at “soft” data and sentiment, the economy and markets are in Nirvana, Valhalla, and Paradise combined.

Back in the real world of “hard” data, however, things aren’t quite so great.

•Retail sales, where consumers translate all that positive sentiment into cash purchases, rose 0.4% in April, less than expected, after a couple of soft months. “Consumer confidence may be through the roof but retail sales, and consumer spending in general, have been stuck on the ground,” Econoday observed.

•Sales of new cars and trucks fell in April for the fourth consecutive month, and inventories are piling up at dealers. That inevitably leads to “incentives,” i.e., deep discounts, which cut into auto makers’ profits. So, GM is planning to lay off 4,000 employees and Ford is cutting 10% of its workforce, including former CEO Mark Fields. “There are growing signs that America’s car market is running out of gas,” The Economist wrote.

Read: Existing-home sales stall in April as tight supply pushes properties to record low time on the market

Banks are scaling back lending. Commercial & industrial loans outstanding fell to around $2.1 trillion earlier this month, below November’s peak and marking the seventh consecutive month of no growth in these key loans. Every time that has happened since the 1960s, “a recession was either in progress or would start soon,” wrote Wolf Richter on the Wolf Street blog. He called it “a big red flag…Something is seriously wrong.”

•And guess which trend from the 2000s is making a big comeback? No, it’s not Crocs, Segways, Paris Hilton or low-rise jeans. It’s household debt.

Last week the Federal Reserve Bank of New York reported that total U.S. household debt had hit $12.7 trillion, a record. True, mortgage debt comprises 68% of the total, vs. 73% in the 2000s, but student loan debt is soaring, at $1.3 trillion. And unlike with a mortgage, you can’t just send your diploma back to the lender. That means “more Americans are shouldering a type of debt that could weigh them down for the rest of their lives,” the New York Times wrote.

So, what are we to make of all this?

Stocks have moved up based on two things—a big earnings recovery and hopes the Trump administration would cut taxes, slash regulations and build big infrastructure projects. The earnings recovery is still intact, but the Trump agenda is floundering amid Congressional gridlock and the investigation of the Trump campaign’s ties to Russia, which is sucking the oxygen from the room.

Also, we’ve seen several economic indicators topping out: Housing sales are at decade highs, auto sales peaked a few months ago, and unemployment, at 4.4%, is near a cyclical low, with full employment on the horizon or already here.

In an economic recovery and bull market that are eight years old, there’s not much room for improvement. I think we’re in the final innings of both. And the S&P 500’s valuation, at 17.5 times projected 2017 earnings, is pretty high.

So when the soft data say buy, buy, buy, and the hard data say not so fast, I’ll trust the hard data. I’m not yet ready to bail on this market, but it’s surely time for caution.

Now read: What 10 million simulations tell us about President Trump’s chances of achieving 3% economic growth

Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.

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